Wednesday, December 14, 2016

Your credit score is an important number. We all know that is the number companies look at when you want to get a loan or open a new credit card. But did you also know it can affect how much you pay for home and auto insurance? Did you know someone with a poor credit score can pay twice as much as someone with a high credit score for the exact same insurance coverage? Check out this post from FinancialLibre for more info. For that reason, even when I am not looking to open any new lines of credit, I still work to keep my credit score high.

As part of my mission of retaining a high credit score, once a year, I contact my credit card issuers and ask for a credit line increase. How does this help my credit score?

Credit Utilization Ratio

One of the variables that goes into the calculation of your credit score is something called your credit utilization ratio. This can be calculated on a per-card basis (that is, the credit utilization for each card by itself) and overall (based on all your credit cards). Most credit scores use a combination of both ratios to determine your score. The lower this ratio is, the higher your credit score.

How It Is Calculated

As with all things credit cards, math is involved. But it's easy math, so don't fret.

Your credit utilization ratio is simply the amount you have outstanding on a credit card divided by the total amount of credit available on that card. Let's look at a single card first. Suppose you have a credit limit of $1,000 and you have a $250 outstanding balance on that card. Your credit utilization ratio for that card is 250 / 1000, or 25%.

Easy peasy.

Now let's look at your overall credit utilization. Suppose you have three credit cards with the following credit limits and balances:

Card

Outstanding Balance

Credit Limit

Card 1

$250

$1,000

Card 2

$700

$1,000

Card 3

$1,400

$2,000

First, let's look at the individual credit utilization ratios for each card. This is done just like we did previously for the single card. Here's the table updated to include that:

Card

Outstanding Balance

Credit Limit

C.U.R.

Card 1

$250

$1,000

25%

Card 2

$700

$1,000

70%

Card 3

$1,400

$2,000

70%

To find our overall credit utilization ratio, we add up all our outstanding balances and divide by the sum of our credit limits:

Card

Outstanding Balance

Credit Limit

C.U.R.

Card 1

$250

$1,000

25%

Card 2

$700

$1,000

70%

Card 3

$1,400

$2,000

70%

Overall

$2,350

$4,000

58.75%

So looking at this, we can see you are using more than half of the total credit extended to you.

How Does A Credit Limit Increase Help?

So how does increasing your credit limit help your credit score? By increasing your credit limit, your credit utilization ratio will decrease - even if your outstanding balances do not change! Why? MATHS!

By increasing your credit limit, you are increasing the denominator of the ratio. This means you are dividing by a larger number, which results in a smaller number. Let's say we called up all our credit card issuers and got a $500 credit limit increase from each of them. Here's how the table looks now:

Card

Outstanding Balance

Credit Limit

C.U.R.

Card 1

$250

$1,500

16.67%

Card 2

$700

$1,500

46.67%

Card 3

$1,400

$2,500

56%

Overall

$2,350

$5,500

42.73%

Look at that. Even though your outstanding balances did not change, your credit utilization ratio for each card dropped, as did your overall credit utilization ratio! Because all of these figures are used to calculate your credit score, decreasing any or all of them, will increase your credit score.

In Practice, It's Not That Simple

There is one other thing to watch out for. Another part of your credit score is based on how many recent "hard" credit inquiries you have. A slew of credit inquires in a short amount of time will drop your score because it could indicate you are opening a bunch of new credit accounts. How many is "a slew" and how long is "a short amount of time?" That's a secret. The credit reporting agencies don't share that information. The Illuminati forbid it.

So what should you do?

First off, some credit cards don't run a hard credit inquiry when you ask for a credit increase. You can tell if they are going to because they have to ask your permission before doing so. Go online to your credit card's website. You should be able to find an option to request a credit increase. (Note, not all credit cards allow you to do this online. One of mine required that I call the number on my card.) You can go through the process of requesting an increase and, if they ask for your permission to pull your credit, you can simply abandon the process at that point.

Or, go ahead and let them. If you feel your credit is good - or at least, hasn't gotten worse since you opened the card - or if you are not planning on applying for any new credit soon, go ahead and let them pull your credit. If you aren't looking to get a new loan or credit card in the near future, any small hit your score might get from the additional credit inquiries should be gone after a few months pass.

No matter which method is used, you should get an answer to your result immediately.

When you go through the process, you'll need to provide your current income and your current rent or mortgage payment amount. Some cards will ask what you want your new limit to be and some won't.

My Results

My wife and I have our own credit cards - no joint cards. There is no real reason for this. It's just how things started out because we lived together for a while before we got married and combined our finances.

Bank Of America Travel Rewards Card - This is a new card I got about 6 months ago because I'm going to be going to Germany soon and this card has no foreign transaction fees. I was able to request an increase online. I asked for a $1,000 increase and was given a $3,000 increase. Because this is still a fairly new account, I was surprised I got anything at all.

Chase Freedom - I was not able to do this online and when I called the number on my card, they said they had to do a hard inquiry on my credit, which I consented to. I did not ask for a specific amount of increase. They ended up increasing my limit by $4,600 - exactly 20% of my old credit limit.

Citi Black Diamond Visa - This is my wife's card. I was able to request the increase online, but they asked to do a hard inquiry on my wife's credit report. I consented. I asked for a $1,200 increase and they said I would get a response in a few days. Less than 24 hours later, I got an email saying I was approved for the amount I requested (which was about a 20% increase).

My Discover card - I asked for an increase online, no specific amount. They did not check my credit and I got a $500 increase. This was the smallest increase I got and I wonder if it was because I rarely use this card.

My wife's Discover card - Jackpot! I was able to request this online and they did not ask for a credit report. I did not ask for a certain amount and she end up with a $5,000 increase! That represents a 33% increase from her old credit limit!

Your Mileage May Vary

I should also note that both my credit score and my wife's are currently 800 or higher, so we're in the "Excellent" credit rating range. We also never carry a balance on our credit cards, so this process will likely have minimal impact on our scores. So why do I bother?

I look at this as preventative maintenance. The future is uncertain and you never know what may happen. It's easier to get credit when you don't need it than when you do, so I have a reminder in my calendar to do this every year in November.

If you are trying to increase your credit score, this is one method you may want to look into.

Wednesday, December 7, 2016

At the end of each month, I post an update of my goals,
including a brief discussion of any notable events that might have
occurred during the month. The latest month's figures can
always be found under the Featured menu in the menu bar at the top of
the blog.

Last updated: End of November, 2016Current value: $25,757 Change from last month: +$157Percent of Goal: 23.68%

Note that the funds in this account are invested in stock, so there will
be fluctuations in value that are outside my control. I never withdraw
money from this account, so any dips are purely due to stock price
changes.

Events Of Note Last Month:

Net income this month from my online courses was $113.65. My hard money loan generated $133.33 in income. My Amazon Mechanical Turk side hustle earned me $67.15 - significantly lower than the last two months because I was in the process of changing jobs for a couple weeks, so I had little spare time. I took in $20 in misc blog income and $15 from another class action lawsuit settlement. The stock performance of Realty Income continues to suppress my savings. Once again, my monthly gain is less than the amount of cash I deposited to the account.

Looking at the above graph, you can see very little progress made over the past 3 months. Because I invest in the stock market, this can happen. As soon as Realty Income turns around, I'll likely see a nice pop. In the meantime, I'll just collect the 4% dividend each month.

Net Worth Update

For November, our net worth is back to moving in the right direction - up. Gains are mostly due to Mr. Market playing nicer than last month.We saw a $10,636 gain over last month, more than making up for the $4,300 loss in October. I think this a new high.

October 2016

November 2016

Note: Mint.com categorizes our HELOC as a credit card debt, not a loan, hence the apparently high credit card balance.

If you have any questions or suggestions for topics, please drop me a line in the comments section!